Amazon Calls for Renegotiating ePacket Deal with China

Members of Congress turned their attention this week to an issue that’s long been a source of frustration for online sellers. They heard from a panel of experts, including Amazon’s top policy official, about the imbalance in shipping fees that puts U.S. merchants at a competitive disadvantage against foreign retailers, particularly those from China.

Paul Misener, Amazon’s vice president of global public policy, told members of a House subcommittee that U.S. sellers suffer under what he called a “frustrating” and “completely unnecessary and illogical” system whereby Chinese firms can ship low-weight orders to American buyers at significantly cheaper rates than are available to domestic sellers.

“The clear losers are American businesses selling to American consumers, and these are many of the sellers through our website. The clear winners are foreign sellers selling to American consumers. They get a terrific benefit,” Misener said.

“It’s a big deal for our seller customers, and we’re looking out for them. We’re going to be fine either way, but this kind of imbalance for our seller customers is illogical,” he added.

Though much of the discussion at Tuesday’s hearing focused on the ePacket deal that the U.S. Postal Service struck with China Post, lawmakers convened the session to examine the broader global shipping landscape, which is largely governed by the Universal Postal Union (UPU), an international body that sets rates for cross-border deliveries known as terminal dues.

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But as even casual users of the eBay or Amazon marketplace might attest, any consideration of the global shipping landscape in the context of the U.S. ecommerce sector must begin with China.

The system for setting international shipping rates is complicated. The Postal Service offers the ePacket product through a bilateral agreement it reached with its Chinese counterpart, offering special rates for domestic delivery of shipments bound from China weighing 4.4 pounds or less.

Misener pointed out some rather odd pricing disparities that have resulted from that deal. By his estimate, the cost to ship a one-pound package from South Carolina to New York City would run nearly $6; from Beijing to NYC: $3.66.

The terminal dues provided through the UPU framework are a money-losing proposition for the U.S. Postal Service and many other national posts, according to USPS Inspector General David Williams. The IG’s office has reported that the Postal Service lost $75 million last year delivering inbound mail from foreign senders, and the rise of the online channel for cross-border commerce is only adding to the challenge.

“The explosion of ecommerce is creating new areas of concern,” Williams told members of the subcommittee. “The number of small parcels sent to the United States from China has greatly increased. The Postal Service loses money delivering each of these parcels, and China Post can send them at lower rates than even businesses located here in the United States.”

Williams explained that the Postal Service negotiated its ePacket delivery option with the intent of reducing its losses on international shipments. The improvements were marginal, at best. Williams said that in 2012, the Postal Service delivered some 27 million ePacket shipments from China Post, losing an average of $1.10 on each piece – just five cents less than the typical losses under the terminal dues regime set by the UPU.

The Postal Service has said that it is trying to press for a better ePacket deal with China, but that its leverage is poor, given that China can always scrap the bilateral agreement and allow rates to revert to the more favorable UPU terminal dues.

And the ePacket system only covers one portion of the shipping relationship between the national posts of the United States and China. Rates for larger packages that originate with one post and are delivered to their ultimate destination by another are generally governed by the UPU, a United Nations agency that was first established in 1874 and today counts 192 member countries.

One of the prime functions of the UPU Congress, which meets every four years, is to set a rate structure that initiating posts pay their foreign counterparts for last-mile delivery. The organization divides member countries into the categories of “target” and “transitional” nations. Those deemed target countries are generally more industrialized and pay higher shipping rates, while transitional nations pay at a lower fee schedule.

To date, China has been classified as a transitional country, though that will soon change.

Nancy Sparks, managing director of regulatory affairs at FedEx Express, described the UPU framework as one where the “haves pay the have-nots.”

But with economic powerhouses like China and India still designated transitional nations for the purposes of rate setting, Sparks wonders if that binary system is in need of an overhaul.

“What’s brought this problem to a head is the have-nots suddenly have a lot,” she said.

As unfair as she sees the UPU system as an institution, Sparks argued that private-sector providers like FedEx and UPS have it worse than state-run posts.

“They have set up what I refer to as an exclusive club where they offer each other deep discounts. But they don’t offer them to us, so it’s very difficult for us to get into those markets … with an ecommerce product,” the FedEx Express spokesperson said.

Robert Taub, the acting chairman of the Postal Regulatory Commission, recalled a hearing on the issue of UPU rates some 15 years ago, when he was a Senate staffer. Taub noted that witnesses aired the same concerns about market distortions stemming from the UPU rates at that proceeding as they discussed this week, observing that progress in achieving rate reform through the international body has been “glacial.”

The UPU Congress next meets in 2016 in Istanbul. The U.S. delegation will be led by the State Department, which says it will press hard to bring shipping rates closer in line with the true costs, though in a one-nation, one-vote system, change doesn’t come easily.

But the classifications of member nations aren’t static, and, indeed, at next year’s meeting China will for the first time be deemed a target country, subject to the higher rate structure.

Still, Robert Faucher, acting deputy assistant secretary of the State Department’s Bureau of International Organization Affairs, acknowledged the frustration the witnesses and lawmakers expressed, and pledged to advocate forcefully for rate reforms at the Istanbul negotiations.

“I would agree that the pace has been very slow, it could be better, but when you’re negotiating with 192 other countries in a global framework for all these sorts of things it’s not something that we just wish – snap our fingers and have it done,” Faucher said. “We have to work it very carefully, and work it very diligently.”

For his part, Misener is dismissive of the impact that the reclassification of China as a “target” country will have on terminal dues for U.S. deliveries, and points out that any changes in the UPU framework won’t have any direct bearing on the bilateral agreement between the USPS and China Post that governs ePackets.

Instead of relying on the UPU Congress talks, U.S. trade negotiators should make shipping issues a standard part of their discussions with their Chinese counterparts, he argued.

“That’s viewing this completely in a vacuum,” Misener said. “It seems like we have this much broader relationship with China and this ought to be on the table as part of it. And so if the State Department is limiting itself only to negotiating in the UPU, we’re missing an opportunity to view this more holistically as part of our bilateral relationship with China.”

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn.

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